I am trying to understand how Real Options are used as an investment tool for projects.
Can you please help me with the Targhee Log Homes Case?
The questions are:
1. Do you share Bushong and Sweet's concerns that the analyst has missed something?
2. What would you do differently if you were the analyst?
Given the information in the case, I don't think that the analyst 'missed' something. However, it the decision as regards the proposed expansion would have been easier to make for Bushong and Sweet if the analyst also presented the net present value of the project without the year 3 expansion option. This answer is based on the assumption that the return of the investments in net working capital was taken into account in the computation of the terminal value. If NOT, then this is the variable that the analyst missed. The ...
Targhee Log Homes Case Study is used to answer two questions on Bushong and Sweet's concerns about their analyst and what the author would do differently themselves.